Chapter 3: Independence and the Gains from Trade Flashcards
The Production Possibilities Frontier is bowed out, what does this mean?
This implies that society could trade one good for the other depending on the amounts that were being produced
What is Absolute Advantage?
The abilitiy to produce a good using fewer inputs than another producer
In an absolute advantage, the producer..
that requires a SMALLER quantity of inputs to produce a good is said to have the absolute advantage
What is a Comparative Advantage?
The ability to produce a good at a LOWER opportunity cost than another producer
In a comparative advantage, the producer..
who gives up LESS of the other good to produce Good X has the SMALLER opp. cost of producing Good X is said to have the comparative advantage
In these advantages, what is impossible for a person to have?
It’s impossible to have a comparative advantage in BOTH goods bc the opp. cost of one good is the INVERSE of the opp. cost.
EX: If a person’s opp. cost of one good is HIGH, then the person’s opp. cost of the other good must be LOW
What is always possible in advantages?
One person will hvae a comparative advantage in one good and the other person will have a comparative advantage in the other good.
What happen to the economic pie when someone has a comparative advantage?
The person who has that advantage INCREASES the total production in that good, meaning that the economic pie grows larger.
What is the benefit both parties get from trading?
Each parties benefit from trade by obtaining a good at a price that’s LOWER than the person’s opp. cost of that good.
What determines the price at which trade takes place?
Most of the time, the price to buy a good from eachother are BELOW their opp. cost of the good.
What are imports?
Goods produced ABROAD and sold DOMESTICALLY
What are exports?
Goods produced DOMESTICALLY and sold ABROAD
